Despite evidence that skilled labor is increasingly concentrated in cities, whether regional wage inequality is predominantly due to differences in skill levels or returns is unknown. We compare Appalachia, with its wide mix of urban and rural areas, to other parts of the U.S., and find that gaps in both skill levels and returns account for the lack of high wage male workers. For women, skill shortages are important across the distribution. Because rural wage gaps are insignificant, our results suggest that widening wage inequality between Appalachia and the rest of the U.S. owes to a shortage of skilled cities.